Andy Haldane argues for raising UK's inflation target in bid to give
policymakers more 'wiggle room' in fighting downturns - and suggests cash
could need to be abolished

The Bank of England may need to push its interest rates into negative territory to fight off the next recession, its chief economist has said.

Andy Haldane, one of the Bank’s nine interest rate setters, made the case for the "radical" option of supporting the economy with negative interest rates, and even suggested that cash could have to be abolished.

He said that the "the balance of risks to UK growth, and to UK inflation at the two-year horizon, is skewed squarely and significantly to the downside".

As a result, "there could be a need to loosen rather than tighten the monetary reins as a next step to support UK growth and return inflation to target".

Traditionally policymakers have resisted cutting rates below zero because when the returns on savings fall into negative territory, it encourages people to take their savings out of the bank and hoard them in cash.

This could slow, rather than boost, the economy. It would be possible to get around the problem of hoarding by abolishing cash, Mr Haldane said, adding: "What I think is now reasonably clear is that the payment technology embodied in [digital currency] Bitcoin has real potential."

Mr Haldane suggested raising the UK's inflation target to 4pc from the current level of 2pc as an alternative to negative rates. Mr Haldane said that a trend towards low interest rates across the globe has made it increasingly difficult to fight off recessions.

In the past, central banks have helped stimulate economies by slashing interest rates. But with rates at rock bottom in many parts of the world, many have found their ammunition depleted.

“Among the large advanced economies, official interest rates are effectively at zero,” Mr Haldane said.

In the UK, the Bank's interest rate has been stuck at 0.5pc for more than six years.

One way to supply the Bank with more firepower would “be to revise upwards inflation targets”. The UK's inflation target is currently 2pc, but this dates from an era when interest rates were closer to 6pc than 0.5pc. It might be necessary to double that target to 4pc, Mr Haldane argued.

Bank research has determined that slowing growth, ageing populations, weaker investment, rising inequality and a savings glut in emerging markets have all contributed to a generational decline in interest rates.

“That would mean there is materially less monetary policy room for manoeuvre than was the case a generation ago. Headroom of two percentage points would potentially be insufficient." However a hike in the inflation target to 4pc would provide extra "wiggle room".

“The people who tend to get hurt the most by inflation are the poor, the elderly, those that can’t hedge themselves – that’s been the experience throughout history,” the Governor told MPs.

However Mr Haldane said that “there was little evidence to suggest these [welfare] costs would be large”.

He did admit that such a policy change to raise the inflation target was likely to be unpopular. “When the public are asked directly about the inflation target they suggest, on average, that it may, if anything, be a little too high,” he said.

“An inflation target above current levels would not only risk putting central banks’ reputations on the line… it could also jar with the general public’s preferences.”

Mr Haldane also suggested that central banks may have fight off downturns more often, adding that the kind of shocks caused by recent turmoil in Greece and China “should not be seen as independent events”.

“They are part of a connected sequence of financial disturbances that have hit the global economic and financial system over the past decade,” he said, and are indicative of the kind of threat emerging markets could pose to the UK’s recovery.

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